Case Note: Arbitration - Appointment of Arbitrators - Numbers of arbitrators - A mandatory provision of the Arbitration and Conciliation Act, 1996 whether can be waived by the parties - Composition of the arbitral tribunal can be challenged before the arbitral tribunal itself - Such a challenge must be taken under Section 16(2) not later than a submission of the statement of defence - A party would be free, if he so chooses, not to raise such a challenge - Thus Section 10 has to be read with Section 16 and is therefore a derogable provision - Arbitration being the creature of agreement between the parties it would be impossible for the legislature to cover all such aspects - Sections 4,5,10,11,16 and 34 of the Arbitration and Conciliation Act, 1996.

Arbitration – Award - Grounds of challenge to an arbitral award are limited - So long as the arbitral tribunal or the arbitral procedure are in accordance with the agreement of the parties, Section 34 of the Arbitration and Conciliation Act, 1996 does not permit challenge to an award merely on the ground that the composition of the arbitral tribunal was in conflict with the provision of the Part I of the Act.

JUDGMENT

S.N. Variava, J.

1. Leave granted.

2. This Appeal is against a Judgment dated 18th May, 2000. Briefly stated the facts are as follows:

The Appellant and the Respondents are family members who had disputes and differences in respect of the family businesses and properties. All the parties agreed to resolve their disputes and differences through one Mr. Pramod Kumar Khaitan. Subsequently, on 29th September 1996 they agreed that the said Mr. Pramod Kumar Khaitan and one Mr. Sardul Singh Jain resolve their disputes. For the purposes of this Order we are not deciding whether these two persons acted as Arbitrators or Mediators. That is a matter of contention between the parties which we are, at present, not called upon to decide. For the purposes of this order we are presuming that the parties had agreed to the Arbitration of these two persons.

3. The parties made their respective claims before these two persons. All parties participated in the proceedings. On 6th October,1996 an Award came to be passed by the said Mr. Pramod Kumar Khaitan and Mr. Sardul Singh Jain.

4. On 22nd December, 1997 the 1st Respondent filed an Application in the Calcutta High Court for setting aside the Award dated 6th October, 1996. On 17th January, 1998 the 2nd Respondent filed an Application for setting aside this Award. One of the grounds, in both these applications, was that the Arbitration was by two Arbitrators whereas under the Arbitration and Conciliation Act, 1996 (hereinafter called the said Act) there cannot be an even number of arbitrators. It was contended that an arbitration by two arbitrators was against the statutory provision of the said Act and therefore void and invalid. It was contended that consequently the Award was unenforceable and not binding on the parties. These contentions found favour with a single Judge of the Calcutta High Court who set aside the Award on 17th November, 1998. On 18th May, 2000 the Appeal was also dismissed. Hence this Appeal to this Court.

5. When this matter reached hearing on 16th January, 2000, the following Order has been passed by this Court:

Since that question has not yet been decided and question involved is an important question of law likely to arise in future cases, we feel it appropriate that this issue should be decided by larger Bench, of at least three Hon'ble Judges and hence, refer the petitions, namely, SLP (C) 12384 and 13123 of 2000 to a Bench of three Hon'ble Judges.

Accordingly, the Registry is directed to place the papers before Hon'ble the Chief Justice for suitable orders."

6. Accordingly, this matter is before this Bench. At this stage we are only deciding the question of law referred i.e. whether a mandatory provision of the said Act can be waived by the parties.

7. It would be appropriate to set out, at this stage, the relevant provisions of the said Act. Sections 45101116 and 34 read as follows:

"4. Waiver of right to object. - A party who knows that -

(a) any provision of this Part from which the parties many derogate, or

(b) any requirement under the arbitration agreement,

has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is provided for stating that objection, within that period of time, shall be deemed to have waived his right to so object.

5. Extent of judicial intervention. - Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.

10. Number of arbitrators.- (1) The parties are free to determine the number of arbitrators, provided that such number shall not be an even number.

(2) Failing the determination referred to in Sub-section (1), the arbitral tribunal shall consist of a sole arbitrator.

11. Appointment of arbitrators. - (1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

(2) Subject to Sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3) Failing any agreement referred to in Sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.

(4) If the appointment procedure in Sub-section (3) applies and -

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment,

the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(5) Failing any agreement referred to in Sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(6) Where, under an appointment procedure agreed upon by the parties, -

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reachan agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform anyfunction entrusted to him or it under that procedure,

a party many request the Chief Justice or any person or institutiondesignated by him to take the necessary measure, unless theagreement on the appointment procedure provides other meansfor securing the appointment.

(7) A decision on a matter entrusted by Sub-section (4) orSub-section (5) or Sub-Section (6) to the Chief Justice or theperson or institution designated by him is final.

(8) The Chief Justice or the person or institutiondesignated by him, in appointing an arbitrator, shall have dueregard to -

(a) any qualifications required of the arbitrator by theagreement of the parties; and

(b) other considerations as are likely to secure theappointment of an independent and impartial arbitrator.

(9) In the case of appointment of sole or third arbitrator inan international commercial arbitration, the Chief Justice of Indiaor the person or institution designated by him may appoint anarbitrator of a nationality other than the nationalities of theparties where the parties belong to different nationalities.

(10) The Chief Justice may make such scheme as he maydeem appropriate for dealing with matters entrusted by Sub-section(4) or Sub-section (5) or Sub-section (6) to him.

(11) Where more than one request has been made underSub-section (4) or Sub-section (5) or Sub-section (6) to the ChiefJustices of different High Courts or their designates, the ChiefJustice or his designate to whom the request has been first madeunder the relevant sub-section shall alone be competent todecide on the request.

(12)(a) Where the matters referred to in Sub-sections (4),(5), (6), (7) (8) and (10) arise in an international commercialarbitration, the reference to "Chief Justice" in those sub-sectionsshall be construed as a reference to the "Chief Justice of India".

(b) Where the matters referred to in Sub-sections (4), (5),(6), (7), (8) and (10) arise in any other arbitration, thereference to "Chief Justice" in those sub-sections shall beconstrued as a reference to the Chief Justice of the High Courtwithin whose local limits the principal Civil Court referred to inClause (e) of Sub-section (1) of Section 2 is situate and, wherethe High Court itself is the Court referred to in that clause, to theChief Justice of that High Court."

16. Competence of arbitral tribunal to rule on itsjurisdiction. - (1) The arbitral tribunal may rule on its ownjurisdiction, including ruling on any objections with respect tothe existence or validity of the arbitration agreement, and forthat purposes,-

(a) an arbitration clause which forms part of acontract shall be treated as an agreementindependent of the other terms of the contract;and

(b) a decision by the arbitral tribunal that thecontract is null and void shall not entail ipsojure the invalidity of the arbitration clause.

(2) A plea that the arbitral tribunal does not havejurisdiction shall be raised not later than the submission ofthe statement of defence; however, a party shall not beprecluded from raising such a plea merely because that hehas appointed, or participated in the appointment of, anarbitrator.

(3) A plea that the arbitral tribunal is exceeding thescope of its authority shall be raised as soon as the matteralleged to be beyond the scope of its authority is raisedduring the arbitral proceedings.

(4) The arbitral tribunal may, in either of the casesreferred to in Sub-section (2) or Sub-section (3), admit alater plea if it considers the delay justified.

(5) The arbitral tribunal shall decide on a pleareferred to in Sub-section (2) or Sub-section (3) and,where the arbitral tribunal takes a decision rejecting theplea, continue with the arbitral proceedings and make anarbitral award.

(6) A party aggrieved by such an arbitral award maymake an application for setting aside such an arbitralaward in accordance with Section 34.

34. Application for setting aside arbitral award.- (1)Recourse to a court against an arbitral award may bemade only by an application for setting aside suchaward in accordance with Sub-section (2) and Sub-section (3).

(2) An arbitral award may be set aside by the Courtonly if-

(a) the party making the application furnishesproof that-

(i) a party was under some incapacity; or

(ii) the arbitration agreement is not validunder the law to which the partieshave subjected it or, failing anyindication thereon, under the law forthe time being in force; or

(iii) the party making the application wasnot given proper notice of theappointment of an arbitrator or of thearbitral proceedings or was otherwiseunable to present his case; or

(iv) the arbitral award deals with a disputenot contemplated by or not fallingwithin the terms of the submission toarbitration, or it contains decisions onmatters beyond the scope of thesubmission to arbitration;

Provided that, if the decision onmatters submitted to arbitration canbe separated form those not sosubmitted, only that part of thearbitral award which containsdecisions on matters not submitted toarbitration may be set aside; or

(v) the composition of the arbitral tribunalor the arbitral procedure was not inaccordance with the agreement of theparties, unless such agreement was inconflict with a provision of this Partfrom which the parties cannotderogate, or, failing such agreement,was not in accordance with this Part;or

(b) the court finds that-

(i) the subject-matter of the dispute osnot capable of settlement byarbitration under the law for the timebeing in force, or

(ii) the arbitral award is in conflict withthe public policy of India."

8. The said Act was enacted to consolidate and amend the law relating todomestic and international commercial arbitration and for mattersconnected therewith and incidental thereto. One of the objects of thesaid act is to minimise the role of Courts in the arbitration process. Itis with this object in mind that Section 5 has been provided. Judicialauthorities should not interfere except where so provided in the Act.Further Section 34 categorically provides that the award can be setaside by the Court only on the grounds mentioned therein. Thereforeone of the aspects which would have to be considered is whether the1st and 2nd Respondents case fell within any of the categories providedunder Section 34.

9. Mr. Venugopal submits that Section 10 of the said Act is amandatory provision which cannot be derogated. He points out thateven though the parties are free to determine the number ofarbitrators such number cannot be an even number. He submits thatany agreement which permits the parties to appoint an even numberof arbitrators would be contrary to this mandatory provision of the saidAct. He submits that such an agreement would be invalid and void asthe Arbitral Tribunal would not have been validly constituted. Hesubmits that composition of the arbitral tribunal itself being invalid theproceedings and the Award, even if one be passed, would be invalidand unenforceable.

10. Mr. Venugopal submits that Section 4 of the said Act would onlyapply provided :

(a) a party knew that he could derogate from any provision of thisPart or

(b) a party knew that any requirement under the arbitrationagreement had not been complied with

and the party still proceeded with the arbitration. He submits that,this case does not fall under category (b) above. He submits thateven category (a) would not apply because wavier can only be inrespect of a matter from which a party could derogate. He submitsthat in respect of provisions which are Non-derivable there can be nowaiver. He submits that Section 10 is a provisions from which a partycannot derogate. He submits that matters from which a party cannotderogate are those provided in Sections 4, 891011(4) and (6) 12, 13(4)16,(2) (3) and (5) 22(4)27313334(2) and (4) 35, 363738(1) and 43(3). He submits that as against this matters from which a party can derogate are those provided under Section 11(2), 19(1) and (2) 20(1) and (2) 22(1)242526 and 31(3).

11. Mr Venugopal submits that Section 10 compulsorily precludesappointment of an even number of Arbitrators in public interest and asa matter of public policy. He submits that if there are an even numberof Arbitrators there is a high possibility that, at the end of thearbitration, they may differ. He submits that in such a case partieswould then be left remediless and would have to start litigation or afresh arbitration all over again. He submits that this would result in acolossal waste of time, money and energy. He submits that to avoidsuch waste of time, money and energy the Legislature, has in publicpolicy, provided in a non-derogatory manner, that the number ofarbitrators shall not be even.

12. He submits Section 16 does not provide for any challenge tot hecomposition of the arbitral tribunal. He submits that a reading ofSection 34(2)(v) shows that the Legislature contemplated achallenge to the composition of the arbitral tribunal. He submits thatsignificantly Section 16 does not provide for a challenge to thecomposition of the arbitral tribunal. He submits that an invalidcomposition of the arbitral tribunal goes to the root of the jurisdiction.He submits that an arbitral tribunal which has been illegal constitutewould have no jurisdiction or power to decide on the question of itsinherent lack of jurisdiction. He submits that Section 16 does notcover and would not govern such a challenge. Mr Venugopal submitsthat the High Court was right in setting aside the Award on thisground. He submits that this Court should not interfere.

13. On the other hand, Mr. Dwivedi submits that Section 4, and 10 and16 are part of the integrated scheme provided in the said Act. Hesubmits that the provisions have to be read in a manner wherebythere is no conflict between any of them or by which nay provision isnot rendered nugetory. He submits that undoubtedly Section 10provides that there should not be an even number of arbitrators. Hepoints out that Section 10 starts with the words" "The parties are freeto determine the number of arbitrators". He submits that arbitration isa matter of agreement between the parties. He submits thatgenerally, in an arbitration, the parties are free to determine thenumber of arbitrators and the procedure. Parties could agree upon aneven number of arbitrators. He submits that even after a party hasagreed to an even number of arbitrators he can still object to thecomposition of the arbitral tribunal. He submits that such objectionmust be taken before the arbitral tribunal not later than the date ofsubmission of the statement of defence. HE points out that underSection 16(2) such an objection can be taken even though the partieshad appointed or participated in the appointment of the arbitrator. Hesubmits that the wording of Section 16 are wide enough to cover evenan objection to the composition of the arbitral tribunal. He submitsthat a conjoint reading of Sections 4, 10 and 16 indicates that if anobjection is not taken before the arbitral tribunal within the time laiddown under Section 16(2), then the party would be deemed to havewaived its right to object by virtue of Section 4. He submits that anaward could be challenged on ground of composition of the arbitraltribunal only provided that an objection is first taken before thearbitral tribunal under Section 16 and the arbitral tribunal has rejectedsuch an objection.

14. Mr. Dwivedi submits that Section 34(2)(a)(v) does not permitthe setting aside of an award on the ground of composition of thearbitral tribunal if the composition was in accordance with theagreement of the parties. He submits that Section 34(2)(a)(v) wouldcome into play only if the composition was not in accordance with theagreement of the parties. He points out that in this case thecomposition is in accordance with the agreement of the parties and,therefore, the award cannot be set aside on this ground. Mr. Dwivedisubmits that even presuming that Section 34(2)(a)(v) permitted achallenge on the ground of composition of the arbitral tribunal stillthe Court may refuse to set aside the award. He points out that thewords used, in Section 34, are "an arbitral award may be set aside bythe court". He submits that in this case the Respondent had enteredinto such an agreement. He submits that they had participated in thearbitral proceedings without any objection. He submits that therecould be no law which permits a party who has so appointed andparticipated to then resile and seek to have the award set aside. Hesubmits that it would be against public policy to permit waste of time,money and energy spent in the arbitration by having the award setaside. He submits that it would also be inequitable to permit such aparty to challenge the award on this ground. He submit that theimpugned Orders of the High Court cannot be sustained and require tobe set aside.

15. We have heard the parties at length./ We have considered thesubmissions. Undoubtedly, Section 10 provides that the number ofarbitrators shall not be an even number. The question still remainswhether Section 10 is a Non-derivable provision. In our view theanswer to this question would depend on question as to whether,under the said Act, a party has a right to object to the composition ofthe arbitral tribunal, if such composition is not in accordance with thesaid Act and if so at what stage. It must be remembered thatarbitration is a creature of an agreement. There can be no arbitrationunless there is an arbitration agreement in writing between theparties.

16. In the said Act, provisions have been made in Sections 12, 13and 16 for challenging the competence, impartiality and jurisdiction.Such challenge must however be before the arbitral tribunal itself.

17. It has been held by a Constitution Bench of this Court, in thecase of Konkan Railway Corporation Ltd. v. Rani Construction Pvt.Ltd. MANU/SC/0053/2002 : [2002]1SCR728 that Section 16 enables the arbitral tribunal to rule onits own jurisdiction. It has been held that under Section 16 thearbitral tribunal can rule on any objection with respect to existence orvalidity of the arbitration agreement. It is held that the arbitraltribunals authority under Section 16, is not confined to the width of itsjurisdiction but goes also to the root of its jurisdiction. Not only thisdecision is binding on this Court, but we are in respectful agreementwith the same. Thus it is no longer open to contend that, underSection 16, party cannot challenge the composition of the arbitraltribunal before the arbitral tribunal itself. Such a challenge must betaken, under Section 16(2), not later than the submission of thestatement of defence. Section 16(2) makes it clear that such achallenge can be taken even though the party may have participatedin the appointment of the arbitrator and/or may have himselfappointed the arbitrator. Needless to state a party would be free, if heso choose, not to raise such a challenge. Thus a conjoint reading ofSections 10 and 16 shows that an objection to the composition of thearbitral tribunal is a mater which is derogable. It is derogablebecause a party is free not to object within the time prescribed inSection 16(2). If a party chooses not to so object there will be adeemed waiver under Section 4. Thus, we are unable to accept thesubmission that Section 10 is a Non-derivable provision. In our viewSection 10 has to be read along with Section 16 and is, therefore aderogable provision.

18. We are also unable to accept Mr. Venugopal's argument that, asa matter of public policy, Section 10 should be held to be non-derogable. Even thought the said Act is now an integrated law on thesubject of Arbitration, it cannot and does not provide for allcontingencies. An arbitration being a creature of agreement betweenthe parties, it would be impossible for the Legislature to cover allaspects. Just by way of example Section 10 permits the parties todetermine the number of arbitrators, provided that such number is notan even number. Section 11(2) permits parties to agree on aprocedure for appointing the arbitrator or arbitrators. Section 11 thenprovides how arbitrators are to be appointed if the parties do notagree on a procedure or if there is failure of the agreed procedure. Areading of Section 11 would show that it only provides forappointments in cases where there is only one arbitrator or threearbitrators. By agreement parties may provide for appointment of 5 or7 arbitrators. If they do not provide for a procedure, then Section 11 does not contain any provision for such a contingency. Can this betaken to mean that the Agreement of the parties is invalid. Theanswer obviously has to be in the negative. Undoubtedly theprocedure provided in Section 11 will mutatis mutandis apply forappointment of 5 or 7 or more arbitrators. Similarly even if partiesprovide for appointment of only two arbitrators, that does not meanthat the agreement becomes invalid. Under Section 11(3) the twoarbitrators should then appoint a third arbitrator who shall act as thepresiding arbitrator. Such an appointment should preferably be madeat the beginning. However, we see no reason, why the two arbitratorscannot appoint a third arbitrator at a later stage i.e. if and when theydiffer. This would ensure that on a difference of opinion the arbitrationproceedings are not frustrated. But if the two Arbitrators agree andgive a common award there is no frustration of the proceedings. Insuch a case their common opinion would have prevailed, even if thethird arbitrator, presuming there was one, had differed. Thus we donot see how there would be waste of time, money and expense if aparty, with open eyes, agrees to go to Arbitration of two persons andthen participates in the proceedings. On the contrary there would bewaste of time, money and energy if such a party is allowed to resilebecause the Award is not of his liking. Allowing such a party to resilewould not be in furtherance of any public policy and would be mostinequitable.

19. Even otherwise, under the said Act and grounds of challenge toan arbitral award are very limited. Now an award can be set asideonly on a ground of challenge under Section 12, 13 and 16 providedsuch a challenge is first raised before the arbitral tribunal and hasbeen rejected by the arbitral tribunal. The only other provision isSection 34 of the said Act. The only ground, which could be pressedin service by Mr. Venugopal, is that provided under Section 34(2)(a)(v). Section 34(2)(a)(v) has been extracted hereinabove.According to Mr. Venugopal if the composition of the arbitral tribunalor the arbitral procedure, even thought it may be in accordance withthe agreement of the parties, is in conflict with a provision of the Actfrom which the parties cannot derogate, then the party is entitled tohave the award set aside. he submits that the words "unless suchagreement was in conflict with a provision of this Part from which theparties cannot derogate" as well as the words "failing such agreement"show that an award can be set aside if the agreement is in conflictwith a provision of Part I of the said Act or if there is no agreementwhich is in consonance with the provisions of Part I of the said Act. Inother words, according to Mr. Venugopal, even if the composition orprocedure is in accordance with the agreement of the parties an awardcan be set aside if the composition or procedure is in conflict with theprovisions of Part I of the said Act. According to Mr. Venugopal thewords "failing such agreement" do not mean that there should be noagreement in respect of the composition of the tribunal or the arbitralprocedure. According to Mr. Venugopal, an agreement in respect ofthe composition of the arbitral tribunal or arbitral procedure which isnot in consonance with a provision of Part I of the said Act would beinvalid in law and therefore would be covered by the phrase "failingsuch agreement". He submits that the words "failing such agreement"mean failing an agreement which is in consonance with a provision ofPart I of the said Act. He submits that Section 34(2)(a)(v) entitles theRespondents to challenge the award and have it set aside.

20. In our view, Section 34(2)(a)(v) cannot be read in the manneras suggested. Section 34(2)(a)(v) only applies if "the composition ofthe arbitral tribunal or the arbitral procedure was not in accordancewith the agreement of the parties". These opening words make itvery clear that if the composition of the arbitral tribunal or the arbitralprocedure is in accordance with the agreement of the parties, as inthis case, then there can be no challenge under this provision. Thequestion of "unless such agreement as in conflict with the provisionsof this Act" would only arise if the composition of the arbitral tribunalor the arbitral procedure is not in accordance with the agreement ofthe parties. When the composition or the procedure is not inaccordance with the agreement of the parties then the parties get aright to challenge the award. But even in such a case the right tochallenge the award is restricted. The challenge can only be providedthe agreement of the parties is in conflict with a provision of Part Iwhich the parties cannot derogate. In other words, even if thecomposition of the arbitral tribunal or the arbitral procedure is not inaccordance with the agreement of the parties but if such compositionor procedure is in accordance with the provisions of the said Act, thenthe party cannot challenge the award. The words "failing suchagreement" have reference to an agreement providing for thecomposition of the arbitral tribunal or the arbitral procedure. Theywould come into play only if there is no agreement providing fr thecomposition of the arbitral tribunal or the arbitral procedure. If thereis no agreement providing for the composition of the arbitral tribunalor the arbitral procedure and the composition of the arbitral tribunal orthe arbitral procedure was not in accordance with Part I of the said Actthen also a challenge to the award would be available. Thus so long asthe composition of the arbitral tribunal or the arbitral procedure are inaccordance with the agreement of the parties, Section 34 does notpermit challenge to an award merely on the ground that thecomposition of the arbitral tribunal was in conflict with the provisionsof Part I of the said Act. This also indicates that Section 10 is a derogable provision.

21. Respondents 1 and 2 not having raised any objection to thecomposition of the arbitral tribunal, as provided in Section 16, theymust be deemed to have waived their right to object.

22. For the reasons aforesaid, the Judgment of the learned singleJudge and the Division Bench on the question of law discussed cannotbe sustained. They are accordingly set aside.

23. The Appeal be now placed before a Bench of two Judges forconsideration of other aspects which are stated to have been raised.

S.N. Variava, J.

1. The question of law having been decided in the Judgment dated 20th February, 2002 passed in Civil Appeal No. 1382 of 2002 [Arising out of SLP (C) No. 12384 of 2000] this Appeal be now placed before a Bench of two Judges for consideration of other aspects which are stated to have been raised.